ANR Pipeline Co., Colonial Pipeline Co., Columbia Gulf Transmission Co. v. TN Board of Equalization

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

February 20, 2002 Session

ANR PIPELINE CO., COLONIAL PIPELINE CO., COLUMBIA GULF

TRANSMISSION CO., ET AL. v. TN BOARD OF EQUALIZATION

Direct Appeal from the Tennessee State Board of Equalization

No. M2001-01098-COA-R12-CV

No. M2001-01117-COA-R12-CV - Filed December 19, 2002

No. M2001-01119-COA-R12-CV

Pipelines for the transport of petroleum products were installed sub-surface by various companies

which acquired easements over affected freeholds. These pipelines were assessed as real estate for

purposes of taxation. Petitions for Review were filed by the Pipeline Companies alleging that the

pipelines were personal property. The decision of the Board of Equalization is reversed.

Tenn. R. App. P. 12(I) Direct Appellate Review; Judgment of the Tennessee State Board of

Equalization is Reversed and Remanded

BEN H. CANTRELL, P.J., M.S., PATRICIA J. COTTRELL , J. and JOHN B. HAGLER, SP . J.

Harlan Dodson, III, and Paul Parker, Nashville, Tennessee, for the appellant, ANR Pipeline.

Everett B. Gibson, Memphis, Tennessee, and Ron L. Quigley, Atlanta, Georgia, for the appellant,

Colonial Pipeline Company.

Brigid M. Carpenter, Nashville, Tennessee, James W. McBride, Washington, D.C., and Stephen

Dorr Goodwin, Memphis, Tennessee, for the appellants, Columbia Gulf Transmission, East

Tennessee Natural Gas, Midwestern Gas Transmission, Southern Natural Gas Company, Tennessee

Gas Pipeline Company, Texas Eastern Transmission Corporation, Texas Gas Transmission Corp.,

and Trunkline Gas Co.

Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General; Mary Ellen

Knack, Assistant Attorney General; Robert Lee, Staff Attorney, for the appellee, State of Tennessee.

James Charles and Jennifer Clinard Surber, Nashville, Tennessee, for Intervenor, Metropolitan

Government of Nashville & Davidson Co.

Jean Dyer Harrison, Nashville, Tennessee, and Jeffrey Dean Moseley, Franklin, Tennessee for

Intervenor, Williamson County Government.

OPINION

PER CURIAM

The Office of State Assessed Properties [OSAP]1 classified the appellants’ pipelines as real

property, as contrasted to personal property, for purposes of ad valorem tax assessments, beginning

in 1997. These actions are the genesis of the resulting administrative proceedings initiated by the

affected companies2 [Pipeline Companies] contesting the validity of the classification.

In accordance with Tenn. Code Ann. § 67-5-1505 the Board of Equalization [Board]

appointed an Administrative Law Judge [ALJ] to conduct a hearing of the consolidated cases. By

separate Orders issued in January 2000, the ALJ upheld the classification by OSAP.3 This decision

was appealed to the Assessment Appeals Commission which certified the classification question to

the Board.

The final administrative authority for the assessment of all centrally-assessed utilities4 is the

Board of Equalization, see Tenn. Code Ann. § 67-5-1328, which, in March 2001, issued an opinion

sustaining the ruling of the ALJ. As provided by Rule 12, Tenn. R. App. P., the Pipeline Companies

appealed directly to this court. Presented for review is the dispositive issue of whether the pipelines

are real or personal property. Our review is de novo on the record with no presumption of

correctness. Tennessee Code Annotated § 4-5-322(h) provides the bases for the modification or

reversal of the Board’s decision.

Analysis

The classification of property as real or personal is important because of decisions of the

Board to equalize the level of assessment of tangible personal property of centrally-assessed utilities

such as the Pipeline Companies, and the level of assessment of locally-assessed tangible personal

property. Since 1997 the Board has ordered a 15 percent reduction in the assessed value of centrally-

assessed tangible personal property in order to bring it to the same level of assessment as locally-

assessed tangible personal property. For this reason, it has been necessary for OSAP to determine

the legal nature of the properties owned by the Pipeline Companies in Tennessee. The Pipeline

1

An adjunct agency of the Office of the Comptroller.

2

ANR Pipeline Co.; Colonial Pipeline Co.; Columbia Gulf Tra nsmissio n Co .; East T ennessee N atural G as Co .;

Midwestern Gas T ransmission Co.; Texa s Eastern T ransmission Corp.; Trunkline Gas Co.; Texas Gas Transmission

Corp.

3

The ALJ went further and ruled that certain surface equipment was real property notwithstanding the

stipulation of the p arties to the con trary.

4

These are entities such as railroad, telephone companies and pipelines which are assessed by OSAP rather

than by local county assessors. Tenn. Code Ann. § 67-5-1301.

-2-

Companies and OSAP agreed on the classification of all of the companies’ property except the

“pipelines”. The parties stipulated that the only issue before the Administrative Judge was the

proper classification of the pipelines. The parties further stipulated that the appropriate definition

of “pipelines” is contained in the Uniform System of Accounts promulgated by the Federal Energy

Regulatory Commission. Account No. 367 of the system of accounts defines the elements of

“transmission system mains.” Among other things, the items listed under the definition of

“pipelines” include valve operating mechanisms, bypass assemblies, cathodic protection equipment,

pipe coding, and the pipes and fittings.

The business of the Pipeline Companies implicates interstate commerce and thus is regulated

by Federal law for the most part. To install a pipeline, easements must be acquired from affected

landowners. These easements provide that for a recited consideration the owner(s) of the affected

real estate conveys to the pipeline company an easement to “lay, construct, maintain, operate, alter,

repair, replace, move, and remove pipe lines. . . . along a route to be selected by [the Pipeline

Company] under, upon, over, and through the lands of grantor . . . ” The easement further provides

that the “[Pipeline Company] agrees to pay to the owner of said land and to any tenant or lessee

thereof . . . any damages to fences, growing crops, and timber which may be covered by constructing

. . . replacing . . . moving or removing the pipelines . . .”5 (Emphasis supplied).

As found by the Board and not disputed, the salient facts may be quickly summarized.

Colonial Pipeline transports petroleum products through over 5,000

miles of pipeline running from Texas to New Jersey, including 387

miles of main and stub lines in eleven Tennessee counties. The other

companies transport natural gas through equally extensive networks

connecting supplies from the Gulf of Mexico to distributors and

distribution sites located throughout the eastern United States. These

networks range from 4 miles (Midwestern) to 1,202 miles (Tennessee

Gas) in Tennessee. Total assessments of the portion of appellants’

property allocated to Tennessee, are about $250 million.

The pipe is coated steel installed generally in 40 foot sections

and having diameters up to 40 inches. Joints are carefully welded and

recoated. Lines are buried typically under 30 inches or more of soil

and lie on a prepared bed of gravel. At periodic intervals there are

valves and surface pumping and distribution stations. With proper

“cathodic” protection (electric currents that inhibit corrosion), the life

of the pipeline is indefinite. It is infrequently moved, and removal

usually occurs because of changes in population or traffic patterns at

the surface that require rerouting or replacement of pipe sections. It

is usually not economically feasible to reuse removed pipe elsewhere

5

The easement expires when no longer used for the purpose expressed.

-3-

in the pipeline, though scrapped pipe often finds its way into a variety

of surface uses, such as supports for billboards.

Maintenance of pipelines is an ongoing, constant necessity. Pipe damaged in various ways,

such as by corrosion, or struck by heavy equipment, must be replaced. If pipelines are replaced,

removed, or repaired the land is always restored, and pipelines can be removed without damage to

the real estate. Portions of a pipeline are routinely moved to facilitate the construction of highways

and buildings, and for other reasons, the chief one being that the landowner requests the removal.

The parties agree that the resolution of this appeal is controlled by application of the

following definitions of real and personal property contained in the property tax provisions of the

Tennessee Code:

(9) “Real property” includes lands, tenements, hereditaments, structures,

improvements, movable property assessable under § 67-5-802, or machinery

and equipment affixed to realty (except as otherwise provided for herein) and

all rights thereto and interests therein, equitable as well as legal.

(12) “Tangible personal property” includes personal property such as goods,

chattels, and other articles of value which are capable of manual or physical

possession, and certain machinery and equipment, separate and apart from

any real property, and the value of which is intrinsic to the article itself.

Tenn. Code Ann. § 67-5-501.

The pipeline does not enhance the value of the freehold, and is not an improvement to the

freehold. It is “separate and apart” from the freehold; the owners of the land traversed by the

pipeline have no claim or interest in the pipes or appurtenant equipment. The pipeline is not affixed

to the land in the legal sense, because it can be, and sometimes is, moved. In Dudzick v. Lewis, 135

S.W.2d 496 (Tenn. 1939) the Court explained that

[i]t is now the generally recognized rule that the manner of annexing chattels to realty

is not the controlling consideration in determing whether or not the chattels becomes

a part of the realty. The question of the intention of the parties to a lease is generally

held to be controlling in determining in doubtful cases whether or not a chattel

annexed to realty becomes a part thereof and the property of the lessor.

We agree that simply because the pipeline is buried three feet underground is not

determinative of the issue. The intention of the parties control. We do not believe that upon

completion of the construction of the pipeline title thereby passed to the landowner as it would have

if the Board’s position is the correct one.

In this jurisdiction, the law of fixtures is controlling of the issue at Bar.

-4-

In Tennessee only those chattels are fixtures which are so attached to

the freehold that, from the intention of the parties and the uses to

which they are put, they are presumed to be permanently annexed, or

a removal thereof would cause serious injury to the freehold.

Johnson v. Patterson, 13 Lea [81 Tenn.], 626; De Graffenreid v.

Scruggs, 4 Humph. [23 Tenn.], 451, 40 Am.Dec.658; Union Bank

& Trust Co. v. [Fred W.] Wolfe, 114 Tenn. 255, 86 S.W. 310, 108

Am.St.Rep., 903, 4 Ann.Cas. 1070. The usual test is said to be the

intention with which a chattel is connected with realty. If it is

intended to be removable at the pleasure of the owner, it is not a

fixture.

Hickman v. Booth, 131 Tenn. 32, 173 S.W. 438 (1914). See also Harry J. Whelchel Co. v. King,

610 S.W.2d 710 (Tenn. 1980); Memphis Housing Authority v. Memphis Steam Laundry-Cleaner,

Inc., 463 S.W.2d 677, 679 (Tenn. 1971).

The law of fixtures concerns the relative priorities of ownership to a particular item of

personal property. See, e.g., Green v. Harper, 700 S.W.2d 565 (Tenn. Ct. App. 1985) (dispute

between lessor and former lessee over property previously installed on the premises by lessee

wherein it was stated that the question was one of intention and “relation of the parties”); Harry J.

Whelchel Co. v. King, supra, (question of intent and “character of the parties”). There can be no

doubt, as we have said, that the intent of the parties is the single dispositive factor in determining

whether an item of personal property is a fixture, and thus will be deemed to be a part of the realty

upon which it is attached. Memphis Housing Authority v. Memphis Laundry, supra; Knoxville

Gas Co. v. W.I. Kirby & Sons, 32 S.W.2d 1054 (Tenn. 1930); Hubbard v. Hardeman County Bank,

868 S.W.2d 656 (Tenn. Ct. App. 1993).

To belabor the point, the parties’ intent is the dominant theme in practically all of the cases

addressing the law of fixtures. But not even this single statement is capable of application in all

situations owing to the difficulty encountered in attempting to discover intent, particularly in cases

where, as here, the issue is raised by the taxing authority in purported reliance upon a statute. As

between the landowner and the Pipeline Company there can be no doubt that the pipelines are

personal property. 6 It was clearly never intended by either party that the pipes – obviously personal

property before being rolled into the trench – would not lose that status simply by being covered over

to enable the landowner to resume the surface use of his land. Otherwise, the pipeline became the

property of the landowner subject only to the provisions of the easement, an obviously unintended

result. The statutory definition of real property – with respect to the taxing power – is not essentially

different from the common law definition; “affixed to the realty” is the operative statutory phrase,

which implicates intent. See, Dudzick, supra.

6

The pipelines are not trade fixtures, which are items brought upon the land by a tenant for the purpose of

carrying on a business. They remain personalty. This principle is limited to situations involving a landlord and tenant

relationship. See, Saunders v. Stallings, 52 Tenn. 65 (18 71).

-5-

The Pipeline Companies exercise complete dominion and control over the pipe in the ground,

and can move it however and whenever they see fit. There is no evidence that the parties intended

or expected that the pipelines would ever become a permanent fixture upon the freehold. No

landowner can seriously claim ownership of the pipe simply because it happens to be buried in his

land. To the contrary, the pipe is treated as property belonging to the Pipeline Companies which they

can remove at their pleasure. The easements so provide. This single fact is sufficient to prove the

intent of the parties and thus mandate that the pipelines are personal property under Tennessee law.

Harry J. Whelchel Co. v. King, supra; Memphis Housing Authority v. Memphis S. L. C., supra.

The decision of the Board is reversed and this case is remanded to the Board for the entry of

an order that the pipelines and surface equipment shall be treated as personal property for purposes

of ad valorem taxation. Costs are assessed to the appellee.

PER CURIAM

-6-